The 5 Areas Where Lenders Will Qualify for a Commercial Real Estate Loan

The 5 Areas Where Lenders Will Qualify for a Commercial Real Estate Loan

If you’ve owned and rented residential real estate and are considering investing in commercial real estate, it’s important to understand some key differences. Lenders apply much more scrutiny to commercial real estate loans, as they can be bigger risks. If you understand that it’s a different type of business with different criteria for loan approval, you’ll be much better suited to successfully transitioning. Here are the 5 key areas lenders will be examining.

Net Worth

It should come as no surprise that lenders will need to determine the difference between your assets and liabilities, also known as your net worth. A rule of thumb is that the number must be at least equal or greater to the value of the loan. An exception to that is having a higher income or earning potential; that can make up a shortfall between your net worth and the loan value.

Income

In the case of a commercial real estate loan, many factors are taken into effect when examining income; it isn’t simply your take-home pay. While the key ingredient in most personal or even residential real estate loans is debt-to-income ratio, in commercial real estate, lenders are most concerned with your global cash flow. That number is how much cash is earned after debts are serviced. This is especially helpful to lenders who are evaluating borrowers with multiple properties in their portfolio.

Credit Score

While a good credit score is always a good thing, it is not as all-important in a commercial real estate as it is in residential mortgages. That said, if your credit score is below 600, you will have a harder time securing a commercial loan, and will need to provide explanations and documentation. If it is below 500, you will have a very difficult time qualifying.

Liquidity

Lenders place a high value on liquidity, the amount of actual cash you have available for immediate use. Lenders always like to see borrowers have cash left over after closing to cover emergency expenses. 10 to 20% of the loan value is generally considered a good amount of cash to have on hand.

Ownership and Management Experience

Finally, lenders will need to know how experienced you are with owning and managing real estate, especially if you plan on hiring a third-party to service the building or buildings. You’ll need to be well versed in aspects of management like leasing and performing background and credit checks.